Equity release could take over a million retirees out of poverty, providers claim - but critics tell them to improve terms

Over a million pensioners could be lifted permanently out of poverty by taking out a 'lifetime mortgage' on their property to boost their retirement income, providers have claimed.

Struggling retirees who find themselves asset-rich but cash-poor should consider unlocking value in their homes as a way of ensuring a more comfortable retirement or paying for their care in their later years, a panel of experts said today at the launch of a report into equity release by provider Just Retirement.

The industry and policymakers have been
searching for solutions to the growing problem of shrinking retirement
incomes. Employers have closed most generous final salary pension
schemes, and inadequate saving levels and poor returns from
annuities has meant many workers face retiring on substantially less
than they expect.

Safe as houses? There is a reticence among the older generations to take out loans against their property.

Costly care bills have added to the squeeze on incomes.

Most pensioners are either unaware of
equity release, have doubt about its safety, or are reluctant to
significantly devalue their property, but the report into its
effectiveness estimates that 1.6million pensioners could be taken above
the poverty line by taking out a product over the next three decades.

Equity release sees retirees borrow money against the equity in their home, which is then taken out of the property's value - with interest - when they die. It is a niche product, with just 16,095 households using it in 2011.

Interest rates are more than those on comparable mortgage products and this quickly eats into the value of the property because no repayments are made - eroding what can be passed on as inheritance.

Oxford Economics, which carried out the research, claimed that current equity release products could be improved to pay regular annual payments with no initial payment, rather than the bulk of cash being released in the first year.

Based on current customer numbers,
unlocking £60,000 on the value of a home and spreading payments at a
rate of £5,000 a year over 12 years will take 247,000 households above
the current income poverty threshold of around £13,000 by 2040.

But,
if there is a significant growth in equity release over that time, it said this number
could rise to 1.6 million by 2040.

Were
customer levels to remain the same, without the creation of products that make level annual payments - just 63,725 would be taken out of poverty by 2040 through equity
release.

There is the option to take equity release as a lump sum, but currently only 20 per cent of customers do this.

The remaining 80 per cent take out a drawdown product, in which they take a large chunk of their equity release loan (anywhere from 12 to 90 per cent of the total value) in the first year, before taking the rest in smaller annual payments from then on.

Call for change: Baroness Sally Greengross said there needs to be a change of attitudes towards the cost of retirement.

Baroness Sally Greengross, former director
general of Age Concern, said that there is a reticence in government to
endorse equity release due to the current attitude in society being that
of protecting the value in your property.

She said: 'If you have a home worth a
lot of money, deferring payments until after you're dead can make it
worth a good bit less, but it does not seem to be the end of the world.

'But for a minister or a local MP it
is a very difficult think to sell and everyone shies away from it...as
they will never be re-elected.

'There needs to be a change in attitudes and there's a need to educate people who will be paying for care about how much money they will need in their later life, particularly those on low incomes.'

She
said: 'In reality most people are taking out another mortgage on their
property, having spent most of their working lives paying theirs off.

'Now
you're asking people to pay interest rates five or six times more than
the current bank base rates, and double what their children are paying
if they get a mortgage.

'This will not move forward until the industry comes forward with better value products.'

Steve Lowe, of Just Retirement, said: 'Building the products for the market, the significant part is how the demand is created.

'There needs to be a significant
public service campaign to explain the responsibilities citizens now
have for paying for their long term care.

'Not many use these products for luxuries or frivolities, but for topping up their retirement income.'

Gemma Tetlow, of the Institute for Fiscal Studies, said: 'Recent state pension policies have started moving towards providing a lower level of basic income...as it focuses on poverty avoidance levels, so it has increasingly become the individual's responsibility to provide an adequate rate of income.

'So far there has been a relatively thin market [for equity release] because pensioners have not had to use their houses in this way before, as they have been on defined benefit pension schemes which are more generous to them.

'But in the future people might want to use it in this way if they are living on a low income, so demand for those products might increase.'